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This article was coproduced with Chuck Walston.
Nicholas Ward’s article, How I Beat The Market Again In 2023, just debuted on our Investing Group. I have a great deal of respect for Nicholas, and the two of us have similar investment styles.
Something else we share is the belief that, contrary to naysayers (including a fellow named Buffett), your common Joe and Jolene can consistently beat the market.
Since I can’t say it better than Nick, here is the intro to his article.
My biggest pet peeve when it comes to investing is the constant negativity by the uber-bears, the disheartened traders, the financial advisers or other know-it-all “professionals”, and even to a certain extent, the Bogleheads, who all stand on their collective soapbox together and declare that it’s impossible for the average Joe living on Main Street to beat the market.
Actually, it’s more than that. This notion is not just an annoyance to me. It fills me with abhorrence.
I hate the group-think that causes so many people to believe that success is not achievable.
It is.
I hate the idea that the stock market is a wild casino where only speculators and large risk-takers can win big.
It’s not.
I especially hate the idea that the stock market is rigged against the Average Joe.
Once again, it’s not.
In 2023 I beat the stock market, yet again.
While I can’t claim that’s my biggest pet peeve, folks’ lack of understanding of the market was in a photo finish with the IRS for something that I rail against.
In fact, I’ve spoken with Brad about co-authoring a book to help people understand the enormous potential that investing has in bringing positive change to their lives.
Let me add that I’m an “average Joe.”
I was raised dirt poor, and I joined the Army in the waning days of Vietnam to become an Airborne Ranger. After over a decade of service, I began a career as a law enforcement officer.
In other words, I have no formal training or education related to finance or investing. I simply read several dozen books (at least half of which were worthless, or worse) and studied the markets.
If I can do it, so can you. It’s that simple.
The Proof Is In The Pudding
Of course, anyone can say they beat the market, but the refrain “show me the money” comes to mind when one makes that claim.
The list below provides the returns of my Buy-rated articles published for our members in the months of October, November, and December.
Note that I did not include my single Speculative Buy ticker. I consider a Speculative Buy as a completely different category in terms of the information I provide to readers.
All results are as of midday on 01/05/24. It is assumed that an equal sum would be invested in an S&P 500 index fund and the highlighted stock on the day the articles appeared.
Note that only one ticker is repeated, Taiwan Semiconductor (TSM), and then on one occasion.
This list provides the stock/ticker symbol, the percent gain or (loss), followed by the corresponding gain or (loss) in the S&P 500.
- Kroger (KR) 2.34 1.74
- McDonald’s (MCD) (2.3) (1.35)
- Johnson Controls (JCI) 7.81 (1.2)
- Air Products and Chemicals (APD) (1.46) (1.2)
- PepsiCo (PEP) .05 .06
- Fifth Third Bancorp (FITB) 15.43 2.0
- Boston Properties (BXP) 27.05 2.8
- Cummins (CMI) 5.66 2.9
- American Express (AXP) 13.16 2.9
- Taiwan Semiconductor 2.24 2.8
- Alphabet (GOOG) (.47) 4.0
- Discover (DFS) 30.89 6.3
- Medtronic (MDT) 17.23 12.54
- Mastercard (MA) 12.3 9.67
- Elevance (ELV) 3.36 8.7
- U.S. Bancorp (USB) 17.03 9.25
- Charles Schwab (SCHW) 25.72 7.4
- Broadcom (AVGO) 19.75 7.34
- Comcast (CMCSA) (2.68) 8.35
- Taiwan Semiconductor 12.3 8.35
Of the 20 stocks rated as buys, 16 provided positive returns. Thirteen beat the market, and 10 recorded double-digit gains. The time-weighted returns for the Buy-rated stocks were 12.85% versus 4.59% for the S&P 500 (SP500).
In other words, my buy-rated picks over the last quarter beat the S&P 500 by over 8%.
I’ll add that these numbers do not reflect the stock’s total returns. The listed tickers have an average yield of 2.48%, a full percentage point higher than the S&P 500.
The Foundation Of My Selection Process
When I evaluate a stock, it is rare for me to consider an investment in companies that do not possess the following characteristics.
A company I consider would have investment-level credit ratings. It should be understood that some smaller companies are not evaluated by the major credit rating agencies, so I will make exceptions in that circumstance.
I also take a close look at current debt, cash and cash equivalents, and a firm’s debt ladder.
I review each company’s performance relative to the S&P 500 over the last 3-, 5-, and 10-year periods. I fully acknowledge that positive past performance does not guarantee a stock will perform well in the future. However, it is common for stocks that have performed well over the last decade to continue to do so moving forward.
I seek companies that have a long history of paying dividends and have relatively low or moderate payout ratios relative to their industries. I also seek companies that either have high yields or a history of high dividend growth.
I prefer companies with moat-worthy businesses.
I have a strong preference for companies that are members of an oligopoly. A prime example of this is Home Depot (HD) and Lowe’s (LOW).
I also view firms with large-scale advantages in a favorable light. Walmart (WMT) and Costco (COST) come to mind here.
I make occasional exceptions. For example, Nexstar (NXST) does not have investment-level credit, and Prologis (PLD) does not possess a moat. However, both companies dominate their industries and have safe, rapidly growing dividends.
I seek a valuation that provides a margin of safety. However, over the years I’ve evolved into an investor who views the overall quality of a company (one that ranks among the best of breed) as a margin of safety in and of itself. That means that I am willing to invest in top-notch companies at valuations that are just a bit below what I perceive as fair value.
Obviously, due diligence is also required when making an investment decision. However, the above checklist can work to cull potentially poor investments.
My Current Ratings Of The Above Listed Stocks
When I reviewed the above-listed companies, I was surprised that despite the gains posted by many of the stocks, I still view most as buys.
I consider FITB, BXP, USB, and AVGO as Reasonable Buys.
To rate as a Reasonable Buy, a stock must trade in a range that I view as a fair valuation and stand as a leader in its industry. I am willing to dollar cost average into stocks that I rate as Reasonable Buys.
(Despite my Reasonable Buy rating, I would not be surprised to see AVGO’s share price move up markedly.)
I rate the remainder of the stocks listed above as Buys.
In the case of SCHW, MCD, CMI, TSM, MA, and AXP, an increase in share price of 5% to 10% would change my ratings to a Reasonable Buy. That assumes no changes to the investment thesis.
I believe CMCSA, MDT, JCI, KR, CI, APD, GOOG, DFS, and ELV have double-digit upside potential.
My sole hold is PepsiCo. I am re-evaluating my investment thesis on the company after Carrefour (OTCPK:CRRFY), the world’s largest supermarket chain, with operations that stretch across 30 countries, announced that it would stop selling Pepsi, Doritos, and other products in France, Italy, Spain, and Belgium due to price increases.
Summing It All Up
A skeptic might claim that a three-month stint beating the S&P 500 doesn’t amount to much. My response is that I have recorded market-beating returns for an extended period.
One example is my recent article in which I chronicle how my 2023 buy ratings on Seeking Alpha outperformed the market by over 5%. This outperformance occurred even though I focused on dividend-paying stocks which performed rather poorly for most of the year.
As 2022 came to a close, I provided a piece on Seeking Alpha showing that my top five picks, which I offered in an article published at the beginning of that year, beat the market by over 10%.
I could provide additional proof of outperformance over the years, but hopefully, I’ve proven my point.
If I can beat the market, you can beat the market.
Nick’s article outlines how his returns outpaced the S&P 500 by just over 2%. Once again, naysayers might claim that a 2% return over the market isn’t much to brag about.
Au contraire!
If one invested $10,000 and garnered an annual 10% return, the initial investment would equal roughly $174,500 after thirty years. The same sum invested for thirty years with a 12% annual return would grow to nearly $300,000.
In fact, beating the market by a mere half of one percent (10.5% versus 10%) over 30 years would result in that $10,000 growing to about $200,000, a 14.6% difference in one’s gains.
You and I can beat the market, and it can make an enormous difference in our results!
While I disagree with Buffett’s view that the average person should stick to index funds, I wholeheartedly agree that one should not invest in a business that you do not understand.
Having said that, expanding one’s knowledge base can bring hefty rewards. Pushing your limits a bit means you might make a few bad investments, but it can also lead to outsized returns.
In other words, it’s OK to make mistakes.
My motto is that I learn from my mistakes, that’s why I keep making so many of them.
All joking aside, I endeavor to continually learn more about the market. For example, I previously eschewed investments in business development companies (“BDC”) as I assumed their big dividend payouts were likely sucker yields.
In large part through the work of contributors on our Investing Group, I eventually gained an understanding of BDCs, and they now constitute nearly 10% of my portfolio.
Last but far from least, I believe that investors should not focus on beating the S&P 500 over short time frames. Attempting to beat the market month in and month out can lead to poor returns over longer periods.
I’ve been making the case that the very fact that dividend-bearing stocks have underperformed the market through most of 2023 is an opportunity to beat the market by a wide margin over the long haul.
I’ll close by saying that Brad, Nick, and I, as well as the rest of the team, focus on dividend-bearing SWAN investments: companies that are likely to outperform over long time periods. And my and Nick’s results are just two examples of how the average Jolene and Joe can beat the markets.
Note: Brad Thomas is a Wall Street writer, which means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.
